"Bankruptcy is about financial death and financial rebirth ... we're a nation of debtors" Elizabeth Warren, U.S. Senator, Massachusetts.
Since considering bankruptcy can be both misleading and confusing, this blog will outline for financially distressed consumers the basics of bankruptcy.
Bankruptcy is the procedure for legally declaring an inability or impairment of an ability to pay back creditors. Either individuals or businesses can file for bankruptcy. Involuntary bankruptcy happens when a creditor files a bankruptcy application against a debtor with the hope of either recouping a portion of the debt or initiating a restructuring plan. Voluntary bankruptcy, which happens the majority of the time, is when the debtor (the insolvent individual or organization) files for bankruptcy.
Title 11 of the United States Code lists six types of bankruptcy under the Bankruptcy Code. The main ones are:
Chapter 7 is the basic liquidation of assets for individuals and businesses. It's the most common type of bankruptcy because it's the quickest and simplest way to file. When the debtor files for Chapter 7 bankruptcy, he, she or it turns over all non-exempt assets to a bankruptcy trustee, who then converts them to cash for distribution to creditors. Under New Jersey law, the most common exempt assets are cemetery property, worker benefits, crime victims' compensation, certain types of insurance benefits, pension and retirement benefits, old age assistance, unemployment compensation, and workers' compensation. New Jersey does not have a homestead exemption or a specific motor vehicle exemption. However, it is one of the few states that allow the debtor to choose to which set of exemptions better protects their assets, federal or state.
Chapter 9 is a municipal bankruptcy, which resolves civic and public debts.
Chapter 11 is designed for corporations or partnerships and allows for the reorganization and rehabilitation of business debtors to continue operating while the debts are repaid over time.
Chapter 13 helps individuals with a regular source of income who want to restructure all or part of their debts with a payment plan over a period of three to five years. Also, this type of bankruptcy appeals to individuals who have non-exempt property that they want to keep.
Chapter 15 is a new chapter added to the bankruptcy laws as an auxiliary or secondary bankruptcy for international cases. Chapter 15 Bankruptcy provides a fair and predictable method for dealing with debtors that have assets in several countries. Its primary purpose is to promote cooperation between U.S. courts, appointed representatives and foreign courts.
Bankruptcy should be a last resort for restructuring debts. Consulting with a bankruptcy lawyer is highly recommended for people and businesses in financial distress to review their options. Kieu-Nhi Le, Rutgers School of Law Newark candidate for a JD degree in May 2016. She is the Managing Business Editor of the Rutgers Computer and Technology Law Journal collaborated with me on this blog.